If you’re in the business of procurement, you may have been taught to negotiate for the lowest price possible — no matter what.
But as negotiations become more complex, even in procurement, is this still the best strategy?
We don’t think so. Our procurement negotiation strategies focus on building lasting relationships with suppliers, creating total value in every deal, and fostering a win-win outcome through strategic negotiation.
We share a few of our secrets to successful procurement negotiation below.
Understanding the 3 Key Stages in Procurement
Procurement is a critical business function that encompasses a range of activities necessary for an organization to obtain goods and services.
Understanding the key stages of procurement before beginning the negotiation process can ultimately allow negotiators to better plan strategic negotiations with every supplier.
Following the sourcing stage, purchasing must take place.
Negotiators and purchasers will need to:
- Negotiate pricing and terms of the contract
- Create a purchase order
- Receive and inspect delivered goods
Once goods have been purchased and delivered, the shipping and receiving and accounts payable teams must:
- Conduct three-way matching by comparing purchase orders to receipts and invoices
- Approve the invoice and arrange payment
- Keep a record of the purchase and payment for future reference
When working with new suppliers, negotiators should be involved in almost every stage of negotiation, purchasing, and receiving of the product. Team cohesiveness and supplier communication throughout the process can help to ensure a winning outcome.
Below, we focus on the negotiation side of procurement with proven strategies that you can apply to any industry.
6 Procurement Negotiation Strategies That Shift the Power Balance
At The Maker Group, our seasoned negotiators have decades of combined experience in procurement negotiations across all industries. It’s our goal to show companies how to maximize the value of every negotiation.
By leveraging technology and our proprietary Maker Framework, we show procurement negotiators how to achieve their goals and boost profitability. Using tactical and structured negotiation practices, negotiators can bring value to every deal.
These are our top procurement negotiation strategies that you can implement today.
#1: Focus on Total Value — Not Price
Have you ever heard the expression, “Buy cheap, pay twice?” Or maybe you’ve heard someone say, “Pay peanuts, get monkeys.” Both mean the same thing. And in procurement negotiation, they definitely ring true.
Instinctively, procurement negotiators aim to get their goods and services at the lowest possible price from suppliers. But this type of negotiation style can leave the door wide open for quality issues in both the items or services being acquired as well as the customer service received from the supplier.
Instead, focus on the total value of the deal. This means that you might not be choosing the supplier with the lowest price. Because if you do, you could miss out on details that can affect quality or performance.
By looking at the big picture, including price, quality, performance, and supplier relationship, you’ll be more likely to negotiate deals that don’t cost you more than you bargained for in the long run.
#2: Know Your KPIs
This brings us to your KPIs (key performance indicators). With the exception of heavily commoditized products, every organization should have KPIs that need to be met.
As a good negotiator, you’ll want to view every RFI (request for information) as an opportunity to determine how it stands up to the list of KPIs needed from the product or service you’re trying to procure. This knowledge can help you eliminate any RFI that doesn’t meet your requirements.
While it’s important to keep your bottom line in mind, identifying suppliers that provide the quality of goods and services needed to fulfill your capacity to deliver reliable products to your customers is just as important. Your track record depends on it.
#3: Make Compromises
Unfortunately, planning is a critical step in procurement negotiation that often gets overlooked.
Taking the time to map out what’s most important to your organization versus what might be most important to your potential suppliers can give you a huge advantage at the negotiation table.
When you enter a negotiation with the ability to leverage your bargaining points as compromises, it will help to build a solid foundation for long-lasting relationships. Everyone can feel like they’ve won.
But if you skip this step and try to bargain on the fly, you’ll likely end up losing something of importance to your organization in the final deal.
#4: Bring New Markets to the Bargaining Table
One of the quickest and least expensive ways to shift the power balance from supplier to buyer is to offer suppliers new market opportunities in exchange for price concessions. But finding the right market involves a little research.
For example, a frozen food company was complaining about annual price increases from their packaging supplier, and they seemed to have no way out due to supplier patents. Their supplier had them backed into a corner.
However, the frozen food company was on the cusp of expanding into two large developing markets where the supplier had not gained any ground. Suddenly, they had an advantage.
The procurement team realized they could offer the supplier a foothold in these markets. They quickly went to work formulating an offer that would result in a 10% price reduction globally on the condition that they would use the supplier’s packaging in those new markets.
By offering something of undeniable value to their supplier, the company was able to negotiate a lower price, keep their current relationship strong, and foster a win-win outcome.
#5: Change Your Pattern of Demand
You may not have any options for creating new value for your supplier as the frozen food company did, so your next best option is to change your pattern of demand.
This strategy requires a lot of collaboration within your organization because many functions could be affected, and intensive data collection and analysis may be required.
For example, you could start by consolidating your purchase orders across all departments. Collaborate with other departments in your organization to find opportunities to consolidate all spending with individual suppliers.
When you can collectively show your supplier how much is at risk by losing your organization as a buyer, they’re more likely to bargain across the table.
Another option would be to decrease your purchase volume with a powerful supplier by switching to an alternative supplier for some of your needs.
The mere threat of losing your business may encourage the supplier to negotiate better terms or pricing with your company.
#6: Know When To Walk Away
Walking away is often thought of as “easier said than done.” But there may come a time when you have to play hardball, especially when a supplier isn’t making any compromises.
It’s okay to back out or walk away. When done at the right time, you not only establish your authority on the matter, but it may also encourage the supplier to come back to the table with a better deal.
However, we don’t recommend using this as a bluffing tactic or you may leave with nothing — including an alternative.
Every negotiator should have a firm limit and a BATNA (best alternative to a negotiated agreement) in place before playing hardball.
Procurement Negotiation From the Supplier’s Perspective
Procurement negotiators should try to imagine the negotiation through the eyes of the supplier. Not only will the supplier spend a significant amount of time learning about your business requirements, but they’re going to dig into your client interests as well.
Suppliers will want to know:
- Why you’re seeking their product or service
- How their product or service can improve or shape your business strategy
- How their product or service aligns with your client’s interests
- Why you may be replacing your current product or service with theirs
- The details of your current supply contract
- Your negotiation style and strategies
- Where you may be willing to compromise
- What conditions you may consider unfavorable and how they can improve those conditions
If they’re doing their job right, potential suppliers should be putting just as much preparation into the negotiation as you are.
The Advantages of a Win-Win Outcome for Everyone
By anticipating anything and everything a supplier may be doing to prepare for negotiations, you’ll be better equipped to enter into the negotiation with empathy and a strategic approach.
Neither party will be laying all of their cards on the table. Your readiness depends heavily on considering both sides of the negotiation and using the information gathered in your research to leverage your bargaining points.
Once you have a good idea where the supplier may or may not be willing to budge, you can shape your negotiation to create a win-win for both parties.
The Maker Group Offers Procurement Negotiation Training for Every Industry
We’ve trained procurement negotiators at some of the largest companies in the world. With our best-in-class solutions and support, The Maker Group team knows how to help you achieve success in every deal.
Our established and proven methodology utilizes real-world procurement negotiation strategies that can have your negotiators focused on maximizing the value in even the most complex deals.
We know your world, and we understand your challenges.
By leveraging the latest online technology, we can equip procurement negotiators with the tools they need to become the best in the business.
We offer bespoke procurement negotiation training, workshops, and consulting services to procurement negotiators across all industries. Call us today to book your consultation, and let us take your negotiating team from good to great.